Clubs of the 2000s

As the fitness industry moved into the new century, it experienced tremendous growth in club numbers, both in the United States and overseas. It also experienced growth in memberships, going over the 40 million mark for the first time. Much of that growth was from seniors and youth. Other issues, such as competition and tension between for-profits and nonprofits, clubs jumping into the public market and a widening obesity crisis, also affected the industry.

The first decade of the 21st century saw the emergence of Bahram Akradi’s Life Time Fitness, which shared the spotlight with the more established 24 Hour Fitness and Bally Total Fitness. However, these three operations faced competition from other clubs of prominence, such as Club One, Equinox, Gold’s Gym, Planet Fitness, Town Sports International and World Gym.

24 Hour Fitness, San Ramon, CA

The first decade of the 21st century for 24 Hour Fitness included a new ownership group, a new CEO and the departure of the company’s founder.

The 24 Hour Fitness brand exploded in the 2000s with partnerships involving sports celebrities as well as the hit reality TV show “The Biggest Loser.” After Magic Johnson first reached out to 24 Hour in the late 1990s to create a signature sports club, athletes such as Andre Agassi, Shaquille O’Neal, Lance Armstrong, Yao Ming and Derek Jeter followed, as well movie star Jackie Chan.

“We started leveraging their brands with ours,” 24 Hour founder Mark Mastrov says. “The clubs were different and cool. They gave us a lift in the market.”

The tie-in with “The Biggest Loser” began in 2004. The next year, Mastrov himself appeared on the NBC show to welcome new cast members and encouraged them to continue their quest to make health a priority in their lives. 24 Hour outfitted two gyms (one indoor and one outdoor) supplied fitness equipment and provided uniforms for the cast. In recent seasons, 24 Hour has sent personal trainers home with eliminated contestants to help them meet their fitness goals.

“It was a hand-in-glove fit for our brand,” Mastrov says. “It’s a nice relationship with the people at [production company] Reveille and NBC. They grew it well beyond what we could have dreamed.”

In 2008, 24 Hour kicked off a national TV commercial campaign for its 12 Million Lives program. It was the first 24 Hour advertisement on commercial TV.

24 Hour continued to expand its brand presence by sponsoring a high-performance training center for the U.S. Olympic team through its partnership with the U.S. Olympic Committee. 24 Hour has had a presence at the 2004 Summer Olympics in Athens, the 2006 Winter Olympics in Torino, Italy, and the 2008 Summer Olympics in Beijing.

The leadership of 24 Hour Fitness began to change in 2005 when McCown De Leeuw & Co., the private equity investment firm that owned 24 Hour, sold the company to another private equity firm, Forstmann Little & Co. for $1.6 billion. A year after the transaction, Carl Liebert III was appointed 24 Hour’s new CEO while Mastrov became the company’s chairman of the board. Liebert had been an executive for The Home Depot.

“I felt after my first initial meetings with Mark Mastrov and the time we spent together, I was incredibly inspired by what he had created with 24 Hour Fitness,” Liebert said in a 2007 interview. “And extremely humbled [by] the fact that he felt that it was the right time to bring in somebody from outside the industry to come in and take over his company. So, we hit it off together from a personal and professional relationship.”

For many longtime executives of 24 Hour, the direction of the company began to change, and some of them headed off to other fitness club companies, including Planet Fitness, Gold’s Gym, Urban Active and Bally Total Fitness. No departure was bigger or more stunning than Mastrov’s. He left the company in January 2008.

“It was a good time for me to exit,” says Mastrov, who in 2009 started a partnership with the Ultimate Fighting Championship (UFC) to launch a network of UFC gyms. Also involved in the UFC venture is Jim Rowley, a former co-president at 24 Hour. Mastrov and Rowley are owners of the private equity firm New Evolution Fitness Company (NEFC).

24 Hour was part of at least three high-profile lawsuits in the last part of the decade. The company filed a lawsuit in 2008 against one of its main competitors, Bally Total Fitness, alleging that Bally CEO Michael Sheehan, the former 24 Hour chief operating officer, stole trade secrets from the company. Two other similar suits involving Bally and Sheehan were dismissed.

In 2009, two former 24 Hour employees filed a lawsuit against the company on the grounds of discrimination in the workplace, claims that 24 Hour denies. The company also is facing a class-action lawsuit from members who say they were sold all-club memberships that do not allow them to use all 24 Hour clubs. The case is in the discovery phase.

Bally Total Fitness, Chicago

Many of the following events could have occurred over the lifetime of a company, but Bally Total Fitness experienced all of these in just the last half of the 2000s:

Shareholders attempt to overthrow the CEO, who is eventually fired.

The Securities and Exchange Commission (SEC) investigates the company’s practices.

The company files for bankruptcy—twice.

A new CEO is hired, but a rival company sues over the hiring.

As eventful as the decade has been, the 2000s began on a somber note for Bally when Chairman Arthur Goldberg died in late 2000. Lee Hillman, who had been Bally’s CEO and president since 1996, added the chairman’s title to his name.

Bally spent the early part of the decade adding to its portfolio. In mid-2000, Bally bought 13 Gold’s Gyms in Portland, OR, a move that produced litigation on Gold’s behalf but ended in a settlement. Over the next two years, Bally bought Crunch Fitness and its 20 clubs for $90 million and later took over seven clubs operated by Planet Fitness. Bally also went outside North America for the first time by opening up clubs in The Bahamas.

During this time, Bally accepted an invitation to join the International Health, Racquet and Sportsclub Association (IHRSA). Bally was first asked to join IHRSA in 1987, but an outcry from IHRSA members, who questioned Bally’s ethical standards, put an end to the courtship at that time.

It wasn’t long before Bally’s business methods were put to the test again. Soon after Paul Toback took over for Hillman as CEO in 2002, Bally settled with then-New York Attorney General Eliot Spitzer, whose office investigated Bally after hundreds of consumers complained of deceptive advertising and high-pressure sales techniques. Bally agreed to reform its practices.

More troubles started popping up in the mid-2000s. Emanuel Pearlman, head of Liberation Investment Group LLC and a major stockholder of Bally’s, proposed efforts to separate Toback’s duties as CEO and chairman of the board. Later, an internal investigation by the Audit Committee of Bally Total Fitness blamed some of the company’s multiple accounting errors on Hillman and John Dwyer, who was Bally’s CFO from 1996 to 2004. The SEC also began its investigation into Bally for its accounting methods.

Financial troubles continued, forcing Bally to sell its Crunch clubs in 2005 to a private equity firm for $45 million, or about half of what Bally paid for Crunch earlier in the decade. The next year, Bally actively pursued a buyer, with Richard Branson’s Virgin Active among the potential buyers. Bally was more than $700 million in debt.

In early 2006, the power struggle at Bally came to a head at a shareholders’ meeting in Chicago, at which shareholders elected three new members to the Bally board: Barry Elson, Don Kornstein and Charles Burdick. All three were nominated by Pardus Capital Management, Bally’s largest shareholder at the time.

A majority of shareholders also voted on Liberation Investment’s proposal to oust Toback, but the measure did not receive the necessary 75 percent of the votes. A few months later, Toback was fired anyway. Elson was appointed acting CEO, and Kornstein was named interim chairman. During this time, Bally was working with its fourth different CFO in two years.

Before Toback’s ouster, a federal court dismissed a lawsuit against Bally, accusing the company of violating federal securities laws. Also, the New York Stock Exchange delisted Bally’s stock, relegating it to the Pink Sheets.

In May 2007, Elson resigned as acting CEO, and Kornstein was named chief restructuring officer as Bally prepared to enter bankruptcy. An equity group hinted that two potential buyers might be Town Sports International and Life Time Fitness, but as with the Virgin Active report, no transaction transpired.

In July 2007, Bally filed for Chapter 11 bankruptcy, listing assets of $397 million and debt of $761 million. Yet two months later, Bally emerged from bankruptcy after Harbinger Capital Partners, a New York-based private equity firm and one of Bally’s shareholders, bought the company for $233.6 million and became its new owner. Although club closings were predicted during bankruptcy, few were reported. A few months later, in February 2008, Bally reached a settlement with the SEC on the same day the SEC sued Bally on fraud charges relating to its financial statements.

In the summer of 2008, Bally looked to one of its main competitors, 24 Hour Fitness, and hired 24 Hour Chief Operating Officer Michael Sheehan as its new CEO. The move was quickly met by lawsuits filed by 24 Hour, claiming Sheehan took trade secrets with him to Bally. Two versions of this suit were dismissed in court. A third lawsuit is still pending.

Late in 2008, Bally again filed for bankruptcy, reporting $1.4 billion in assets and $1.5 billion in debt. This time, at least 20 Bally clubs closed, although Bally officials said the closings were not related to the filing.

“The burden of Bally’s long-term indebtedness, coupled with the lack of refinancing options in today’s constrained credit markets, have limited our ability to restructure using out-of-court vehicles, leaving Bally with no alternative other than the actions announced,” Sheehan said in a statement.